The Prudent Speculator - Hulbert's Top Performer for the Past 20 Years

John Buckingham
, ContributorI aim to prudently speculate in undervalued, dividend-paying stocks.Opinions expressed by Forbes Contributors are their own.

It isn't every day that one's publication leads off a story in The Wall Street Journal, but newsletter industry watchdog Mark Hulbert was kind enough to write on Saturday, "The investment newsletter, edited by John Buckingham, has the best average annual return over the past 20 years of the 200 advisory services monitored by the Hulbert Financial Digest: 16.3%, compared with 9.5% for the S&P 500, assuming dividends are reinvested." Illustrating the beauty of compounding, $100,000 compounded at 16.3% for 20 years grows to $2,049,000, while the same amount compounded at 9.5% grows to $614,000.

Of course, Mr. Hulbert began his article with, "The Prudent Speculator is not for the faint of heart," which we would have to concede, "Guilty as charged," though we would also argue that the same can be said for value investing in general and perhaps the stock market as well. After all, despite winning the long-term performance derby, the Russell 3000 Value index endured a 62% peak-to-trough decline from June 2007 - March 2009, while the Russell 3000 Growth index plunged nearly 53% from its best level to its worst during that tumultuous period.

The statement was not surprising I suppose, given that he wrote to me in an email last week, "I am hoping to get a comment or two from you for a column I’m writing for this coming weekend’s Wall Street Journal. The subject is my honor roll, which as you know rewards newsletters that produce above-average performance in both up and down markets. I am mentioning yours as a service that, despite not making the honor roll, nevertheless has one of the best overall ratings."

He continued, "My editors would be interested in a comment along the lines of...'it’s important to have long-term discipline through declines, and much of my efforts in editing this newsletter are devoted to educating readers about such discipline.'”

While Mr. Hulbert probably said it as well as could be said, here was my (condensed) response:

Thanks for thinking of us - I've always been sad when the #1 performing long-term newsletter is excluded from your honor roll, though I completely understand and respect your methodology! I could speak for hours on the topic of your note, but I will attempt to give you a few sound-bites...

For someone who shares our long-term investment time horizon, I'd much rather, channeling Warren Buffett here, make a lumpy 15% per annum than a smooth 12%, especially as the achievement of the latter is impossible (nor can the achievement of the former be guaranteed), unless you are Bernie Madoff! Interestingly, the average of your annualized performance numbers for TPS over the past 20, 25 and 30 years has been about 15%!

I recognize that we live in a world very concerned with risk and risk-adjusted return, but I struggle with the one-size-fits-all measuring stick that is utilized to compare long-term-focused strategies with short-term-oriented approaches. I think that the table below is very germane to the risk discussion...historically speaking, the longer one holds, the less the likelihood of loss.

Frankly, I think the true value of a service such as The Prudent Speculator is in the perspective (our experience and historical data analysis) we provide. Yes, the stocks we recommend are very important, but it doesn't matter what we pick if a reader has bailed out of his/her broadly diversified portfolio the first time a worry arises. After all, there is something to worry about every day!

Week after week, I am essentially saying the same thing in my commentaries - strive to keep emotions in check by always focusing on long-term investment objectives and trying to ignore (and take advantage of) short-term fluctuations. Throw in an emphasis on areas of the market (undervalued dividend payers) that have a historical propensity to outperform, along with broad portfolio diversification, and we hope that it becomes much easier for readers to endure the inevitable downturns that will always be part of the investment landscape.

I'll conclude by saying that it is quite telling that of the services you track, the one that has more or less been fully invested for all of its 34 years leads the performance derby. Shows you that implementing a consistent, disciplined investment approach, in our opinion, is the key to achieving financial success, rather than jumping from strategy to strategy.

And for those looking for a couple of undervalued names to be held for their long-term appreciation potential, we would consider giant-capitalization stocks
Microsoft (MSFT) and
Pfizer (PFE).

While Microsoft is long past its days of being grouped with the high-flying tech names, the company is still at the forefront of technologies of all sorts, giving it substantial growth opportunities, yet the P/E ratio is less than 15 while the diverse businesses generate a tremendous amount of cash that allows the payment of a hefty 2.8% dividend.

Drug company Pfizer has been a headline maker of late as it has so far unsuccessfully pursued the acquisition of rival pharmaceutical concern
AstraZeneca. While the hype about a potential deal (and what looks to be the ramifications of its failure) will eventually die down, even without the improved tax position that would have resulted from an AstraZeneca union, Pfizer is a great example of a good company selling at a reasonable price (P/E of 13 and dividend yield of 3.5%) in a market that is trading near record highs.